Use the Information for the Question(s)below

question 62

Essay

Use the information for the question(s)below.
Iota Industries is an all-equity firm with 50 million shares outstanding.Iota has $200 million in cash and expects future free cash flows of $75 million per year.Management plans to use the cash to expand the firm's operations,which in turn will increase future free cash flows by 12%.Iota's cost of capital is 10% and assume that capital markets are perfect.
-Suppose that Iota is able to invest the $200 million in excess cash into a project that will increase future free cash flows by 30%.If you were advising the board,what course of action would you recommend,investing the $200 million in an expansion project that will raise future free cash flows by 30% or use the $200 million to repurchase shares? Which provides the higher stock price?

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Definitions:

Supply Analysis

The examination and evaluation of the supply side of the market, focusing on factors such as production capacity, supplier behavior, and costs.

Primary Industry

The sector of the economy that extracts and harvests natural resources directly from the Earth, such as agriculture, mining, and forestry.

Normal Goods

Goods for which demand increases as the income of the buyer increases, and vice versa.

Income Increase

A rise in the amount of money received, especially on a regular basis, through work or investments.